Debt burden will continue to rise in India: Moody's

Debt burdens will continue to rise, or stabilise at higher levels in countries such as India and Malaysia, according to Moody's Investors Service.

Elevated commodity prices will keep spending on food and fuel subsidies or other measures high, with little impetus to reduce support, particularly for economies with elections approaching in 2023 or early 2024, including Bangladesh and India, Moody's Investors Service says in its latest report.

Countries like Bangladesh, India, Indonesia and Maldives will have elections in 2023 or 2024, constraining their capacity to enact further structural reforms without the prospect of social resistance, says the ratings agency.

Credit worthiness outlook for countries in Asia-Pacific (APAC), including India, is stable for 2023 compared with the negative outlook for sovereigns globally, it says.

"Debt sustainability and financial stability are relatively well anchored in the region, with contained government liquidity risks, broadly stable debt dynamics and generally sound external positions. GDP growth will stabilise close to potential levels and outperform other regions, despite higher global inflation and tighter financial conditions. Most sovereigns have begun fiscal consolidation, but social pressures are slowing progress," Moody's says, adding that debt affordability will fall from generally robust levels as interest rates rise and will be manageable for most in the region.

Higher central bank policy rates, both domestically and externally, coupled with general risk aversion in global capital markets, will lead to higher interest burdens, says Moody's.

"Negative credit effects will also be less pronounced for frontier and emerging markets with a significant degree of concessional financing, including Bangladesh (Ba3 review for downgrade) and Fiji, and those with deep domestic funding, including India, Malaysia and Thailand, where large institutional investor bases and banking systems have helped to anchor debt affordability," it says.

According to domestic brokerage Motilal Oswal, India's government debt surged from 71% of GDP in FY19 to 90% in FY21 will most likely ease to 82.3% in FY23. The increase in government debt is the sum of the primary deficit and the weighted excess of growth over (effective) interest rates. "With nominal GDP growth expected to be 7.3% YoY in FY24 (vs ~15% in FY23 and 20% in FY22), it will be similar to the effective interest rate, pushing the government debt-to-GDP ratio higher to the extent of the primary deficit. Our calculations suggest that India's government debt could rise to 84.7% of GDP in FY24 and further to 85% in FY25," the brokerage said last week.

India is headed for slower growth next year — more in line with its long-term potential — after the country recorded a two-step pandemic recovery in 2020 and again in 2021-2022, as per Moody's Analytics. The ratings and research firm had said China is not the only weak link in the global economy. "The other giant of Asia, India, also suffered a year-to-year decline in the value exports in October. This is rather disappointing following its rapid recovery from widespread shutdowns last year, and again earlier this year," it said.